November 15, 2017

Labor Supply Constraints and Health Problems in Rural America

A recent research study by Alison Weingarden at the Federal Reserve's Board of Governors found that wages for relatively low-skilled workers in nonmetropolitan areas of the country have been growing more rapidly than those in metropolitan areas. In a talk yesterday in Montgomery, Alabama, Atlanta Fed President Raphael Bostic provided some evidence that differences in labor supply resulting from disability and illness may be behind this shrinking urban wage premium.

For prime-age workers (those between 25 and 54 years old), the dynamics of labor force participation (LFP) differ widely between metropolitan and nonmetropolitan areas. (These data define a metropolitan statistical area, or MSA). The LFP rate in MSAs declined by about 1.1 percentage points between 2007 and 2017 versus a 3.3 percentage point decline in non-MSA areas.

The disparity is also evident within education groups. For those without a college degree, the MSA LFP rate is down 2.6 percentage points, versus 5.0 percentage points in non-MSAs. For those with a college degree, the MSA LFP rate is down 0.7 percentage points, versus a decline of 2.5 percentage points for college graduates in non-MSAs. Moreover, although LFP rates in MSAs have shown signs of recovery in the last couple of years, this is not happening in non-MSAs.

A recent macroblog post by my colleague Ellyn Terry and the Atlanta Fed's updated Labor Force Dynamics web page have shown that the decline in prime-age LFP is partly a story of nonparticipation resulting from a rise in health and disability problems that limit the ability to work. This rise is occurring even as the population is gradually becoming more educated. (Better health outcomes generally accompany increased educational attainment.)

The following chart explores the role of disability/illness in explaining the relatively larger decline in non-MSA LFP. It breaks the cumulative change in the LFP rates since 2007 into the part attributable to demographic trends and the part attributable to behavioral or cyclical changes within demographic groups.

The demographic changes—and especially the increased share of the population with a college degree—has put mild upward pressure on the prime-age LFP rate for both the MSA and non-MSA population. Controlling for the contribution from these demographic trends, increased nonparticipation because of poor health and disability pulled down the LFP rate in MSAs by 0.8 percentage points and lowered the rate in non-MSAs by 2.0 percentage points over the past decade. For those without a college degree, disability/illness accounted for about 1.2 percentage points of the 2.6 percentage point decline in the MSA participation rate, and it accounted for 2.6 percentage points of the 5.0 percentage point decline in the non-MSA participation rate.

Taken together with evidence from business surveys and anecdotal reports about hiring difficulties, it appears that the non-MSA labor market is relatively tight. The greater inward shift of the rural supply of labor is showing through to wage costs, and especially for rural jobs that require less education.

Although the move to higher wages is welcome news for those with a job, it also raises troubling questions about why labor force nonparticipation because of disability and illness has increased so much in the first place—especially among those with less education living in nonmetropolitan areas of the country.

It is clear that the health problems for rural communities have been intensifying. Several interrelated factors have likely contributed to this worsening trend, including poverty, deeply rooted cultural and social norms, and the characteristics of rural jobs, as well as geographic barriers and shortages of healthcare providers that have limited access to care. This complex set of circumstances suggests that finding effective solutions could prove difficult.

John Robertson, a senior policy adviser in the Atlanta Fed's research department

Comments

What I have seen is many people who get on disability or trying to get on disability are moving to country because of much cheaper housing costs. For many people living in the city would use up almost their entire disability check. If you're trying to get on disability and and have no work check the cheapest rent is in the country period. This distorts figures to a significant degree also note many people of disability try to have side non 'official" jobs so areas showing high levels of disability might have more available workers then official records might indicate our system seems designed to create a black market of sorts for jobs!

And it's ironic that GOP State fund worker job training only as part of deals including tax breaks for foriegn corporations building factories in the GOP States. Otherwise, tax cuts drive cutting worker education, ending trade training in public education.

In the MSAs the public education and businesses are much more likely to partner on education for business needs, especially when business and management pay significant taxes.

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August 30, 2017

Is Poor Health Hindering Economic Growth?

It is well known that poor health is bad for an individual's income, partially because it can lower the propensity to participate in the labor market. In fact, 5.4 percent of prime-age individuals (those 25–54 years old) reported being too sick or disabled to work in the second quarter of 2017. This is the most commonly cited reason prime-age men do not want a job, and for prime-age women, it is the second most often cited reason behind family responsibilities (see the chart). (Throughout this article, I use the measure "not wanting a job because of poor health or disability" as a proxy for serious health problems.)

In addition to being prevalent, the share of the prime-age population citing poor health or disability as the main reason for not wanting a job has increased significantly during the past two decades and tends to be higher among those with less education (see the chart).

Yet by some standards, the health of Americans is improving. For example, compared to two decades ago the average American is living two years longer, and the likelihood of dying from cancer or cardiovascular disease has fallen. These specific outcomes, however, may have more to do with improvements in the treatment of chronic disease (and the resulting reduction in mortality rates) than improvements in the incidence of health problems.

Another puzzle—which is perhaps also a clue—is the considerable variation across states in the rates of being too sick or disabled to work. For example, people living in Mississippi, Alabama, Kentucky, or West Virginia in 2016 were more than three times likelier to indicate being too sick or disabled to work than residents of Utah, North Dakota, Iowa, or Minnesota (see the maps below).

This cross-state variation is useful because it allows state-by-state comparisons of the prevalence of specific health problems. Among a list of more than 30 health indicators, the two factors that most correlate with the share of a state's population too sick or disabled to work were high blood pressure (a correlation of 0.86) and diabetes (a correlation of 0.83). Both of these conditions are associated with risk factors such as family history, race, inactivity, poor diet, and obesity. Both of these health issues have increased significantly on a national basis in recent years.

So how might poor health hinder economic growth? Health factors account for a significant part of the decline in labor force participation since at least the late 1990s. After controlling for demographic changes, the share of people too sick or disabled to work is about 1.6 percentage points higher today than it was two decades ago (see the interactive charts on our website). Other things equal, if this trend reversed itself during the next year, it could increase the workforce by up to 4 million people, and add around 2.6 percentage points to gross domestic product (calculated using our Labor Market Sliders).

Of course, such a sudden and large reversal in health is highly unlikely. Nonetheless, significant improvements to the health of the working-age population would help lessen the drag on growth of the labor supply coming from an aging population. Public policy efforts centered on both prevention and treatment of work-impeding health conditions could play an important role in bolstering the nation's workforce.

Ellyn Terry, an economic policy analysis specialist in the Atlanta Fed's research department

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May 16, 2013

Labor Costs, Inflation Expectations, and the Affordable Care Act: What Businesses Are Telling Us

The Atlanta Fed’s May survey of businesses showed little overall concern about near-term inflation. Year-ahead unit cost expectations averaged 2 percent, down a tenth from April and on par with business inflation expectations at this time last year.

OK, we’re going to guess this observation doesn’t exactly knock you off your chair. But here’s something we’ve been keeping an eye on that you might find interesting. When we ask firms about what role, if any, labor costs are likely to play in their prices over the next 12 months, an increasing proportion have been telling us they see a potential for upward price pressure coming from labor costs (see the chart).

To investigate further, we posed a special question to our Business Inflation Expectations (BIE) panel regarding their expectations for compensation growth over the next 12 months: “Projecting ahead over the next 12 months, by roughly what percentage do you expect your firm’s average compensation per worker (including benefits) to change?”

We got a pretty large range of responses, but on average, firms told us they expect average compensation growth—including benefits—of 2.8 percent. That’s about a percent higher than the average over the past year (as estimated by either the index of compensation per hour or the employment cost index). But a 2.8 percent rise is also about a percentage point below average compensation growth before the recession. We’re included to read the survey as a confirmation that labor markets are improving and expected to improve further over the coming year. But we’re not inclined to interpret the survey data as an indication that the labor market is nearing full employment.

We’ve also been hearing more lately about the potential for the Affordable Care Act (ACA) to have a significant influence on labor costs and, presumably, to provide some upward price pressure. Indeed, several of our panelists commented on their concern about the influence of the ACA when they completed their May BIE survey. So can we tie any of this expected compensation growth to the ACA, a significant share of which is scheduled to go into effect eight months from now?

Because a disproportionate impact from the ACA will fall on firms that employ 50 or more workers, we separated our panel into firms with 50 or more employees, and those employing fewer than 50 workers. What we see is that average expected compensation growth is the same for the bigger employers and smaller employers. Moreover, the big firms in our sample report the same inflation expectation as the smaller firms.

But the data reveal that the bigger firms are a little more uncertain about their unit cost projections for the year ahead. OK, it’s not a big difference, but it is statistically significant. So while their cost and compensation expectations are not yet being affected by the prospect of the ACA, the act might be influencing their uncertainty about those potential costs.

Comments

Maybe we're finally reaching the point where firms can no longer expropriate productivity gains. If you look at the total hourly compensation for non-supervisory workers vs. productivity, the last 40 years have more or less seen the gains made during the Great Compression utterly obliterated. Now that we're back to Gilded-Age levels of income distribution, it may be that we've reached an equilibrium.

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February 12, 2007

Another Thought On The Edwards Health Care Plan

The U.S. government will help states and groups of states create regional Health Markets, non-profit purchasing pools that offer a choice of competing insurance plans. At least one plan would be a public program based upon Medicare. All plans will include comprehensive benefits, including full mental health benefits. Families and businesses could choose to supplement their coverage with additional benefits. The markets will be available to everyone who does not get comparable insurance from their jobs or a public program and to employers that choose to join rather than offer their own insurance plans.

The one thing that worries me is the possibility that the endgame is domination by the public Medicare-like program, not because it is the best or most efficient means of providing insurance, but because state-run enterprises can stifle the competition by exploiting their access to taxpayer capital.

Fortunately, there is something of a model for markets in which government and private firms compete. That model comes in the form of the Monetary Control Act of 1980, which governs the behavior of the Federal Reserve when it participates in businesses for which there are actual or potential private-sector alternatives. (An example of such a business would be the collection and clearing of checks.) In essence, the rules of the Act require that the Federal Reserve cover its economic costs, which include the return to capital that would be required by the owners of for-profit businesses.

Why is is it necessary to have the government producing services that private firms are able and willing to provide? Whether you are talking about medical insurance or check-processing, it's a good question. But arguably the provisions of the Monetary Control Act resulted in an efficiency-focused government supplier with some devotion to serving markets (community banks in particular) that might have been less desirable to private providers of those services. And that doesn't sound like a bad outcome for a health care system.

Comments

Maybe the times are a changing? First, I find myself in total agreement with you on Gov't's seeming inability to "do" very little right. Then, I realized it's been at least two weeks since I last received a 0% interest credit card offer & this I hope is a sign of a tremendous turn for the best. And, lastly, I found Fed Pres. Pianalto's speech last week illuminating.
We don't need the FED to raise rates, we do need them to be extremely deliberate about lowering them.

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February 11, 2007

John Edwards Leaves The Gate On Health Care

John Edwards jumped ahead of the other designated major candidates in proposing a detailed plan to get to universal coverage.

Hooray for Senator Edwards, who deserves nothing but credit for jump-starting the debate. His proposal envisions a future with mandatory universal insurance coverage, provided through a combination of public and private sources, and "regional Health markets" designed to resolve the problem of constructing adequate risk pools.

The risk-pool problem has presumably helped (along with tax subsidies, of course) to entangle the provision of insurance with employment, but Senator Edwards is apparently uninterested in moving away from employer-based health care plans:

Businesses have a responsibility to support their employees’ health. They will be required to either provide a comprehensive health plan to their employees or to contribute to the cost of covering them through Health Markets.

The tying together of health insurance with employment is partly a legacy of World War II, when employers began to offer health insurance as a fringe benefit to help them compete better for workers whose wages were regulated by the wartime government. Employer-provided health insurance expanded over time even after wage controls were abolished because income tax rates rose greatly over time. This artificial incentive to combine health insurance with employment would be eliminated under [President Bush's] proposal.

...there does seem to be movement toward universal care, and all sides generally agree that employers should get out of the health insurance business.

An argument for employer-based system might start with arguing that it is the only way to combat the isolate and kill strategy of insurance companies described by Brad DeLong:

Insurance companies work like dogs to avoid selling insurance to people who are expensively sick or likely to get expensively sick. As a result, a huge amount of people's work-time and information technology processing power are wasted on the negative-sum game of trying to pass the hot potato of paying for the care of the sick to somebody else. The more people separate themselves or are separated into smaller and smaller pools with calculably different exposures to risk, the worse this problem gets. The way to solve it is to shove people into pools as big as possible.

Tyler Cowen has a response to this, but in any event it would seem that the Edwards regional Health markets gets to that issue independently -- why the insistence that businesses "provide a comprehensive health plan to their employees"?

The best -- or at least the cleverest --argument I've seen for employer-provided insurance comes from Steve Landsburg in his book The Armchair Economist:

Employers typically have less than perfect information about what their employees are up to. This makes it hard to get incentives right. You can't reward productivity that you can't observe...

Many employers provide their employees with more health care coverage than is required by law, essentially giving an extra $500 worth of medical insurance instead of an extra $500 in wages. At first this seems mysterious: Why not give employee the cash and let them spend it as they want? A partial answer -- and perhaps the entire answer -- is that employees prefer nontaxable benefits to taxable wages. But another possible answer is that good health care enhances productivity. If productivity were easily observed and rewarded, there would be no issue here, because employees would have ample incentives on their own to acquire adequate health care. But in a word of imperfect information, employee benefit packages can be the best way to enforce good behavior.

Interesting argument, but it is, of course, a reason employers would continue to provide health care benefits of their volition -- no mandate, or tax subsidy, required.

So, I'm not quite sold on the whole Edwards package, but do say kudos again for laying the ideas out in plain view. Now, I think, the onus is on everyone else to explain what they have in mind, and why it is better than what is now on the table.

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» Blog Round Up: Karl Rove, Health Care, and More from John Edwards 08 Blog
piIs anyone talking about their agenda for America? [Karl]Rove asked, noting the possible exception of former Sen. John Edwards, D-N.C., who has been out of office since 2005./i/p
pSo says Rove in a hre... [Read More]

Tracked on Feb 14, 2007 11:55:01 PM

Comments

I see the Edwards' "pay or play' strategy as a path away from employer-based insurance. It's pretty hard to envision that Congress will just mandate a complete overhaul of the current employer-based system overnight. However, if you mandate a pay or play option, and the pay option becomes progressively more attractive through time (or employers buy into the publicly run system, which gets you pretty much the same place), then we can work our way out of employer-based insurance.

I see 3 basic options in this story;
1)a government-run universal system, similar to medicare;
2) an employer-based system; and
3) an individual based system.

Because I believe so strongly in markets, #3 would be a complete disaster. Private insurers will be far more effective in denying coverage to people who need care, than the government bureaucrats who try to regulate them and prevent this cherry-picking from taking place.

Dean -- I do appreciate the sentiment that it is hard for regulators to stay in front of the designs of profit-maximizing market participants. But that to me also cuts in the direction of feeling a bit queasy at the thought of relying on a government-run system similar to medicare. I can't quite get a glimpse of a workable outcome that doesn't involve some sort of governmental hand in solving the pooling issue. But I also think that on the other side of the negotiating table should be someone who can walk away in the event that what the public's government agent wants to implement is the unworkable or foolish -- which in turn suggests to me that the provision of the insurance itself is best done by competing private firms.

Your point that political feasibility may require a plan that gradually evolves away from an employer-based mechanism is well taken. Maybe we primarily disagree on what it should evolve toward.

John Edwards wants to increase taxes to fund universal healthcare in the taxpayer's view. However, in the long run, Universal Health Care will save money for the American people.
The increase in taxes will be small to the individual in comparison to the cost for a health plan that they face today. Discuss this whether you support or not this proposal at
Isupportthismessage.com

Easystm.com will give Coverage of short term health insurance as early as the next day... just a few simple medical questions to answer. Best of all, you can choose to receive your policy electronically!

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February 01, 2007

One Health Care Problem I'm Not So Worried About

... now Marit Rehavi comes by with an additional reason to despair. For according to her reading, as America ages and as American society changes an increasing share of the increase in health care costs is going to be driven not by increases in adverse selection by insurers or by moral hazard driven by doctors ordering inappropriate and barely effective care, but by expensive chronic diseases and risk factors driven by long-term lifestyle choices.

I've been mulling that one over, and my first reaction is that this additional reason to despair sounds a lot like moral hazard to me. This definition, from The Economist, is pretty serviceable:

Moral hazard means that people with insurance may take greater risks than they would do without it because they know they are protected, so the insurer may get more claims than it bargained for.

So if the problem -- or a big part of it -- is "expensive chronic diseases and risk factors driven by long-term lifestyle choices," then there would seem to be a logical solution: Make people pay for making those bad lifestyle choices. In other words, higher premiums for smokers and for people who are overweight, lower premiums for those who enroll in certified exercise plans, that sort of thing. This is after all, just the market answer to Brad's "nanny state" solution. It wouldn't be perfect, but surely it would go a long way to ameliorating some of the most obvious risks.

That would still leave "adverse selection by insurers or by moral hazard driven by doctors ordering inappropriate and barely effective care" to fret about, but why pile on other problems if we don't have to?

The causes of death have to sum to 100%. So if by changing lifestyles, not smoking for example, we cause one type of death to decline in importance something else must increase in importance to maintain the 100% rule. But since we have no idea what cause of death would increase we have no idea what would happen to health care cost -- they could just as well increase as fall.

Chronic will get bigger just from the fact of the size of the cohort. I can's see moral hazard here. Will I adopt a wild and wooly life style just because I expect to live longer or because I won the genetic lottery? Life style is not very controllable unless you ration care via life style, ie deny smokers/overwight people care for heart disease, organ failure, cancer and similar. Not likely.
Even if you did this, make em pay or rationing, I think it would have very little impact on choice of life style. Young people think they will live forever or think they will never get old.

Interesting that you bring "moral hazard" into this arena, Dave, when the Fed continues to turn a blind eye to the moral hazard it has been contributing to in the liquidity-induced "asset inflation" arena worldwide.

As a sidelight, but related, I'd be interested to your 'take' on Charles Kindleberger' and Robert Aliber's "Manias, Panics, and Crashes: A history of financial crises", AND Peter Bernstein's "Against the Gods: The remarkable Story of Risk".

spencer - "So if by changing lifestyles, not smoking for example, we cause one type of death to decline in importance something else must increase in importance to maintain the 100% rule. But since we have no idea what cause of death would increase we have no idea what would happen to health care cost -- they could just as well increase as fall."

Now, wait a minute. If everyone quit smoking, all hell would break loose and some would be killed. Yeah, think about that.

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Real U.S. median household income rose 1.1% in 2005, climbing for the first increase since 1999, but inflation-adjusted incomes still have not recovered fully from the 2001 recession, the Census Bureau reported Tuesday.

Real median incomes for 2005 rose 1.1% to $46,326 but were down 0.5% from 2001's $46,569. Median income means half of the 114.4 million U.S. households earned less, half earned more. The figures have been adjusted for inflation.

Income inequality continued to increase, with the top 20% of families accounting for a record 50.4% of all household income, just the third time since the mid-1960s that they've taken more than half. For the top 20%, the median income rose by $3,592, or 2.2%, to $166,000.

Meanwhile, the bottom 20% captured just 3.4% of income, matching their lowest share since the mid-1960s. Median incomes for the bottom 20% increased by $17, or 0.2%, to $11,288...

The poverty rate declined for the first time since 2000, nosing down to 12.6% from 12.7%, but this amounted to a statistically insignificant change, the government said. The poverty rate was 1.3 percentage points higher than 2001's 11.3% but was lower than the 13.8% average in the 1990s.

A couple of things I found interesting in details. A few facts: About 27 percent of people 25 years of age or older had incomes less than twice the poverty level. For prime working-age folks -- those between 25 and 65 -- with at least 4 years of college, your chance of having income that low was, in 2005, between 8 and 12 percent (depending on your exact age group). Among those with high-school degrees only, the chance of being in the low income group ranged from 25 to 39 percent. And without a high-school degree? Your chance of having an income less than twice the poverty rate was in excess of 50 percent.

When thinking about income inequality -- especially among those away from the extremely high and extremely low levels of income -- there is just no escaping this picture:

The second thing I found interesting was the reasons that people who were not employed gave for not working:

Conclusion? If you are poor and not working -- which is the most common circumstance for those under the poverty line -- the reasons are not obviously related to the state of the labor market.

UPDATE: The comment by kharris below made me realize that that last sentence is pretty silly. It is clear that choosing retirement rather than work, work at home rather than work in the market, and choosing educational investment over employment are inherently related to conditions in the labor market. I was thinking in terms of conditions related to unemployment, and so the phrase probably should have read:

If you are poor and not working -- which is the most common circumstance for those under the poverty line -- the reasons are not obviously associated with a lack of jobs for those who choose to remain in the labor force.

Stated that way, it is clear that judging this to be a good or bad thing is pretty tricky. Those who are retired or have decided to stay home to attend to family may simply be discouraged by the lack of opportunity. And we might lament that the return to working is so low that poverty is associated with separation from the labor force. On the other hand, we might be encouraged that such a large fraction of those under the poverty line appear to be making a deliberate choice to acauire human capital. This is one of those cases where each of theose reactions is probably justified.

"If you are poor and not working -- which is the most common circumstance for those under the poverty line -- the reasons are not obviously related to the state of the labor market."

Huh? We have no way of knowing how the people below the poverty line are distributed across categories in the reasons-for-not-working pie charts. One could just as easily assert, based on the pie charts, that reasons for poverty are not obviously unrelated to the state of the labor market.

kharris -- The pie chart applies only to people below the pverty line, so I'm not entirely sure what you mean. However, see my comment above, because there is a sense in which my statement was poorly crafted.

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In response to the idea of adding a tax exclusion for individually
purchased health care expenses -- in addition to the current one for
employer-provided care -- Holtz-Eakin had this to say:

I
think it's bad tax policy. We ought to have in this country a tax
system that means something. I am less in favor of tax systems that are
designed to do things other than raise revenue. We are likely to spend
a lot of money in the future. The government is likely to be bigger
than it is now -- I don't know how much -- and we need a tax system
that raises those revenues efficiently and doesn't muck up our economy
too much. Things like this are a recipe for mucky up the tax system and
the economy and so I really am nervous about that as -- from a
tax-policy perspective, and implementation perspective.

In general, I am the picture of sympathy for this sentiment. The best tax code is one that has low marginal tax rates and a broad base. That latter requirement means that there should be minimal use of the tax code as a tool for social engineering (or, worse, political gain).

But I make an exception for health care. The fact is that we are not talking about simply adding a distortion that was previously nonexistent. Distortions are already present in the form of tax preference for employer-provided health insurance expenditures. As Andrew Samwick emphasizes in his related Wall Street Journal debate with Mark Thoma, the idea of the tax-preferred accounts to finance out-of-pocket expenditures is designed to eliminate the perverse incentives created by subsidizing insurance with low deductibles, and to improve the portability of health care provisions.

I gather that Dr. Holtz-Eakin would prefer that we address the problem by eliminating all tax preferences of this sort, and there I am somewhat sympathetic. A preferable course might well be to address some of the regulatory issues that Andrew discusses (such as making health care coverage mandatory) and dealing with the availability of coverage to the poor through a straight system of transfers (although it would be mistaken to claim that this isn't mucking up the tax system to some degree). But absent the social consensus to move in that direction, something like medical saving accounts seems like a reasonable second-best strategy.

Comments

Logically one could combine accounts with removal of tax exemptions for employer paid healthcare moving to a system of individual coverage that could be had regardless of employer. That would be an improvement over the current system, but would people be happy with individual versus group policies? The healthy likely would and the unhealthy likely would not.

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February 08, 2006

This Week In Entitlement Reform

In this the federal budget week, blogland brings a couple of interesting discussions on social security and health policy reform. First up (in reverse chronological order) is the latest Econoblog installment featuring Mark Thoma and Andrew Samwick. This, from Andrew, neatly summarizes my thinking about the foundation on which social insurance reform must be built:

As global trade increases,
the U.S. loses its ability to be the least-cost producer if it
stipulates that employment contracts must include taxes for all manner
of redistributive programs. If we are to purse both social insurance
and economic growth, we need to consider alternatives to the employment
relationship as a way to deal with our health and retirement needs.

Mark agrees, but is skeptical about solutions that rely primarily on the private sector:

There are substantial problems -- market failures
-- in the private-sector provision of health and retirement insurance
that are not easily overcome with market-based regulatory schemes.

For example, adverse selection
issues, where high medical-cost individuals are excluded from coverage
or are forced to pay extremely high premiums, plague health-insurance
markets. High administrative costs
of private health insurance are another problem, and there are problems
in the private provision of retirement insurance as well. When markets
fail, the insured often pay for the uninsured, and for these and other
reasons I believe it's best to share the burden more generally through
government programs that require individuals to contribute insurance
premiums.

I confess that I don't quite buy that one. As Andrew points out, there is a distinction between government regulation of an industry and government production of the service that the industry supplies:

The first mistake is to make insurance voluntary when we don't
subsequently exclude those who need care from getting it at the
public's expense. We should make health insurance mandatory, but we
should do so by putting the mandate on the individual, not the employer...

The second mistake is to allow the tax code to distort the type of
insurance offered. Premiums are fully excludable from taxation, but
out-of-pocket expenses are only imperfectly tax deductible. This
generates extremely generous, first-dollar coverage and little
incentive for individuals to economize on the care they receive. Rather
than the Bush administration's proposal to make out-of-pocket expenses
deductible via expanded medical savings accounts, I favor removing the excludability of health-insurance premiums from taxable income.

The third mistake is to force young workers to subsidize older workers
in group health-insurance markets. Insurance is supposed to transfer
resources from those who have unpredictably low expenses to those who
have unpredictably high expenses.

I agree with Mark that the government should mandate coverage, but that
doesn't mean the government should centralize the provision of services
or dictate their terms. I would prefer to fix some of the obvious
mistakes before making such radical changes to the system.

...many of the problems in the health system are correctable with the
right policies. I believe the three most important defects are the over
40 million Americans who are not insured, the weak incentives to
economize on unnecessary medical spending by most people covered by
some form of health insurance, and the tying together of health
insurance with employment as a result of special tax privileges
provided to employers.

Arguably the best parts of President Bush's State of the Union address
are his suggested reforms in the health care system. They do not fully
attack all the problems, but they do offer significant improvements. I
will concentrate particularly on his proposals to extend Health Savings
Accounts (HSAs), and to improve the portability of health insurance
when workers change jobs.

Professor Becker goes on to an extensive discussion of the HSA proposal, the benefits of such a plan, and a very wise observation about at least one of the costs:

President Bush has proposed changes in the health care system that
initially will reduce tax collections and increase federal spending at
a time when the US government is already spending too much and running
a sizeable budget deficit. However, by making the health delivery
system more efficient, this important set of proposals in the State of
the Union address might end up raising tax collections, and certainly
would improve the efficiency of the American economy.

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Comments

Not exempting healthcare costs from income is not unreasonable, but decoupling healthcare from employment, as is increasingly being done, would expose all of us to the prevalent market failures. If government determines how much should be spent on it, they had better be prepared to pay for it for all those that can't, and this is the largest portion of the population.

Health Savings Accounts, though, really focus on the wrong end of the problem. If we broke the costs down by occurence and treatment we would see the majority of the costs are those that would fall under catastrophic coverage. They would do little to increase efficency.

Lord, Irespectfully disagree. I have a family of four, and a good income. I have elected to get the cheapest insurance I could and pay for medical out of pocket(I am self employed) The HSA account is great for me, because I get to put money away tax free, and if I don't get sick I don't use it. the only thing that worries me is a catastrophic event or illness. I have insurance to cover that.

I agree that the health system of this country is in need for reform. I think that we need to thinking terms of market based reforms and competition, and not of insurance and deductables. there needs to be tort reform as well.

If we went to a simple fee for service system, I think costs would go down, and we would get better service. Vouchers could be given to peopel that couldn't afford it.

I agree with the principle people should pay for the benefits they receive, but realistically fewer than half the people out there are able to do so. Nor do I have any illusions that reducing costshifting will materially alter who pays nor how much they pay. Government is probably the largest costshifter of all and it is unlikely changes along these lines will decrease costs. Government will continue to pay for something like half of all healthcare. Therefore I think it misleading to think of this as a private versus public problem, it is a question of the best way to pay for and provide a public benefit.

We all like tax breaks. It can be structured as accounts plus catastrophic coverage for those with adequate incomes, but what do we do with the other half of the healthcare system, those that don't? Does the government fund their accounts? Does the government cover the catastrophic coverage after your insurer has dropped you, or more likely after you have had to drop it when you could no longer pay the costs? What proportion of the premium did you save over a full coverage plan?

While coverage may be separated from employers, it cannot be separated from employment as that is the only means the vast majority of people have of paying for it.

Lord -- I'm not sure I understand what makes health insurance special here. In the state I live in, automobile insurance is mandatory, and you darn well better have it. Yet nonone suggests that the insurance ought be provided by the government. You might say the example is forced because people can opt out by not driving -- something that would not be available if health insurance is mad amndatory (or at least the opt-out route would totally unacceptable). But that is where government transfers and such come in. My point is simply that there really is a choice between government provided services and government subsidized services and, in most cases I can think of, if one is feasible the other will be as well. And I strongly prefer the latter.

The idea that health insurance isn't enough like auto insurance now, and that HSAs move us further in that direction, is baloney.

You don't pay an "annual deductible" on car insurance - you pay a "per-event deductible". And the stuff that auto insurance covers isn't things that changing your oil would have any effect on, so the oft-claimed perversity of health insurance "covering the equivalent of oil changes" is also baloney.

Lord and M1EK -- I think I made my point poorly. I was only trying to say that the heavy involvement of government in health care is a measure of the social value placed on access to the service, not an intrinsic quality of the moral hazard and adverse selection problems associated with the insurance being provided. The oil change analogy is a clever one, but there are all sorts of other preventative measures that are involved in the types of events that automobile insurance does cover ... not talking on cell phones while driving, not eating when operating a motor vehicle, and so on. Or take homeowners insurance. Fire prevention can be greatly facilitated by the addition of smoke alarms, an appropriate number of well-maintained fire extingushers, regular servicing of furnaces and fire places. Some of these things can be factored into prices, of course, but so it is also with health insurance (in the form of rate reductions for nonsmokers, participants in "wellness" programs, and so on). Or let's get started on life insurance...

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We Are Richer, Therefore We Spend (On Health Care)

It should come as no surprise to anyone that, partly as a result of a persistently higher-than-average rate of inflation in medical care, consumers have been spending a larger and larger fraction of their income on medical care...

... [Bureau of Economic Analysis] data attributes much of this increase in health care's budget share to an increase in real
medical care spending, not to inflation. In other words, the rapid
advances in health care spending during the 2000s are largely due to
the fact that individuals are consuming more health care, according to
the BEA...

A few weeks ago I suggested that higher spending may be associated with declines in the effective cost of medical care, by which I mean costs inclusive of factors such as pain, probability of complications, and recovery time. Implicitly I was suggesting that we overestimate the price of medical services, a possibility Kash notes in his post.

Health care extends life. Over the past half century, Americans spent
a rising share of total economic resources on health and enjoyed
substantially longer lives as a result. Debate on health policy often
focuses on limiting the growth of health spending. We investigate an
issue central to this debate: Is the growth of health spending the
rational response to changing economic conditions---notably the growth
of income per person? We develop a model based on standard economic
assumptions and argue that this is indeed the case. Standard
preferences---of the kind used widely in economics to study
consumption, asset pricing, and labor supply---imply that health
spending is a superior good with an income elasticity well above one.... In
projections based on the quantitative analysis of our model, the
optimal health share of spending seems likely to exceed 30 percent by
the middle of the century.

Kash has it just right when he says

... what is underlying dramatic change in
medical care spending of the past few years. .. [is clearly] an
important question, because it plays a crucial role in understanding
whether the rapid rise in people's spending on health care in recent
years is a good thing or bad.

Comments

If health care has an income elasticity greater than one, all this talk about spending too much on health care strikes me as misdirected. Of course, the fact that income distribution is getting more skewed over time raises some interesting distributional issues. But even Milton Friedman would argue that the U.S. health care market is inefficient. Inefficiency can exist even when the share of income accruing to the product is low - whereas an efficient market could command a large portion of one expenditure if that product is in high demand, which is your point.

Lord -- Agreed, but that wasn't really the question I was thinking about.

pgl -- Agreed as well. In my couple of posts on this topic I haven't meant to imply the absence of things to fix regarding how health care is delivered in this country. But I do think this notion of rising expneditures related to both price and income elasticity captures a very significant element of truth. Would we both agree that the big goal is allocative efficiency, not expenditure reduction?

David - agreed. Also check out the latest from Arnold Kling, which was so brilliant (or was that humorous) that I had to post on it. Short version - health care has to be a Giffin good to accept the White House logic for its own proposal.

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